A time for new ideas Innovation in Central Eastern Europe and Turkey A white paper by the Economist Intelligence Unit sponsored by Oracle A time for new ideas Innovation in Central Eastern Europe and Turkey About the research A time for new ideas is an Economist Intelligence Unit report that looks at the current state and future prospects of innovation in Central Eastern Europe (CEE) The report is sponsored by Oracle The Economist Intelligence Unit bears sole responsibility for the content of this report Our editorial team executed the online survey, conducted the interviews, created the economic model and wrote the report The findings and views within not necessarily reflect the views of our sponsors The report is based on three main components: a worldwide survey of 370 executives carried out in Spring 2008; the Economist Intelligence Unit’s own innovation model; and 25 in-depth interviews with C-level executives, consultants and other experts in the field In addition, we conducted an extensive programme of desk research Over half of the executives surveyed are based in the CEE; all operate significant business in the region; two-fifths have annual global revenues below $100m and 16% over $10bn; over half are either C-suite executives or board members and over one-quarter are CEOs or managing directors, in all representing 19 different industries The survey element did not include firms operating in Turkey The report was written by Paul Lewis The innovation model was produced by Laza Kekic; and in-depth interviews were carried out by Kester Eddy, Richard Eames, David Dyker and Bernard Kennedy; Harald Heubaum compiled the country data in part We would like to thank all the executives who participated in the survey and interviews for their time and insights October 2008 © The Economist Intelligence Unit 2008 A time for new ideas Innovation in Central Eastern Europe and Turkey Executive summary I nnovation has been a driving force of postcommunist economic transition of central and eastern Europe (CEE) over the past two decades Most of this has come not from locally owned firms but from the investments of MNCs, on which local economies have come to rely for new ideas and technology This is particularly so for the development of new products, the main focus of this research paper Such dependence leaves the region’s economies vulnerable, and to overcome this governments, universities and local businesses will have to work together to improve the environment for innovation Based on the Economist Intelligence Unit’s innovation model, our survey of over 370 local and foreign executives operating in the region, and in-depth interviews with company executives, academics and policymakers, the results suggest, however, that progress to date in promoting homegrown innovation has been slow and patchy The report’s key findings are highlighted below: continue to so… The Economist Intelligence Unit’s innovation model suggests that over the last five years CEE innovation has been modest compared with developed EU economies, and that this underperformance will continue over the next five years Innovation is essential for sustainable growth The impact of innovation is shown to be particularly positive on growth for medium-income countries CEE governments should therefore not be tempted by the argument that, as catch-up countries, they only need to imitate and assimilate foreign ideas in order to sustain economic growth Talent-related issues are a major concern Three of the four business operational issues regarded as very important by a majority of our survey respondents were talent-related: availability of university graduates; availability of scientists and engineers; and technical skills of the workforce Finding the right staff has been made harder by the persistence of a “brain drain” from the region MNC innovation brings few benefits to domestic enterprises Despite massive foreign direct investment into the region, and the introduction of modern production and management methods, there have not been sufficient “spillovers” of technology and “know-how” into the domestic economy The CEE region has underperformed and will © The Economist Intelligence Unit 2008 …unless more is done to boost inputs and improve the innovation environment Improving innovation performance requires an increase in direct inputs— such as R&D spending, better science education and IT infrastructure—as well as improvement to the overall innovation environment such as less bureaucracy, fairer taxation and more flexible labour markets Local SMEs have innovated and exported successfully Several local SMEs have shown that successful innovation and export is possible, despite poor brand recognition abroad Such firms may provide a standard for others to follow Innovative firms have mixed views about the ability of government to help Companies in the region are ambivalent about the effectiveness of government reforms Typical complaints include lack of effective tax legislation, particularly regarding tax advantages for start-up businesses and employee share ownership, and weak links with universities A time for new ideas Innovation in Central Eastern Europe and Turkey The table below provides a summary of the results of the Economist Intelligence Unit’s innovation model The first part ranks countries by their respective innovation performance, both current and forecast, based on available patent data The second part ranks countries according to their respective innovation inputs (or enablers) both current and forecast, based on a wide range of direct and indirect factors that contribute to the environment for innovation Summary of innovation rankings current and forecast Ranking by innovation performance Ranking by innovation enablers Innovation performance 2003–07 Global rank 2003–07 Innovation performance 2008–12 Global rank 2008–12 Innovation enablers 2003–2007 Global rank 2003–07 Innovation enablers 2008–12 Global rank 2008–12 Slovenia 7.68 24 7.86 24 7.16 28 7.34 29 Hungary 7.26 27 7.64 26 7.29 27 7.68 25 Czech Rep 6.83 28 7.04 32 7.41 25 7.62 27 Estonia 6.75 29 7.09 31 7.34 26 7.69 24 Slovakia 6.26 36 6.25 41 6.84 29 6.82 30 Latvia 5.89 39 6.42 38 5.87 40 6.41 39 Bulgaria 5.79 41 6.06 48 5.98 37 6.26 44 Poland 5.65 48 6.14 46 6.21 33 6.71 33 Lithuania 5.52 50 5.77 57 6.09 34 6.35 42 Romania 5.25 53 5.87 53 5.61 46 6.25 45 EU10 average 6.29 Russia 6.07 37 6.61 6.39 39 6.37 32 6.70 34 Ukraine 5.37 51 5.77 56 4.69 59 5.11 59 Turkey 5.21 55 5.62 58 5.07 51 5.49 55 EU14a average 8.54 8.66 6.58 6.91 8.53 8.67 a Pre-2004 EU member states excluding Luxembourg Source: Economist Intelligence Unit © The Economist Intelligence Unit 2008 A time for new ideas Innovation in Central Eastern Europe and Turkey Introduction Innovation as an economic necessity Over the past decade the new EU member states from central and eastern Europe (CEE or the EU10) and Turkey have made impressive progress in narrowing the gap in GDP per head with the older members of the EU Growth until now has been predominantly an “extensive” recovery, based on redeployment of existing resources However, this process is coming to an end If growth is to be sustained into the mediumto long-term future, it will have to be based on innovation and technological change The conventional wisdom is that innovation is most likely to be important for spurring growth among the most developed countries, and not lower- or mediumincome countries such as those in CEE or Turkey Other sources of growth are believed to be far more important for poor and middle-income economies that can borrow technology from abroad, and therefore have little or no need to innovate themselves However, recent Economist Intelligence Unit research casts serious doubt on this conventional wisdom It not only shows that innovation and growth are related across all levels of development, but indicates that the impact of innovation on growth for medium-income countries is disproportionately positive This opinion appears to be shared by numerous other institutions The World Bank, for example, concluded in its most recent report on CEE: “Fostering innovation and international competitiveness is a top priority among early reformers in sustaining productivity growth.… Innovation-led productivity growth thus calls for policies that increase private-sector participation in R&D so as to support skill-based industries and move up the value chain in exports.” However, most of the innovation in the CEE © The Economist Intelligence Unit 2008 region in the past two decades has come not from locally owned firms, but from the investments of multinational companies (MNCs), on which local firms have come to rely for new ideas and technology This over-reliance leaves the region’s economies vulnerable, should those MNCs leave for lower-cost markets Local firms therefore need to innovate not only to generate an independent flow of new products and ideas, but also to increase their value to multinational investors and hopefully encourage them to invest further in higher value facilities This will require governments, universities and local businesses to work together, creating intelligent and precisely focused financial incentives, improving links between business and universities, and facilitating a flow of talented and technically skilled graduates into business start-ups and small and medium-sized enterprises (SMEs) This report focuses mainly on the development of new products, with the emphasis on technological innovation rather than business process innovation, although the latter is still important if sometimes harder to measure The report begins with an analysis of the current state of innovation in the CEE region, looking at the dominance of MNCs and the lack of spillovers into the domestic economy The report’s findings are supported by the Economist Intelligence Unit’s innovation model, which combines key innovation inputs and outputs, and demonstrates how innovation activity, outside of MNC investment, is generally weak, and is forecast to remain so over the next five years This is not to say that some locally based firms have not been able to innovate successfully In fact, SMEs created in the past decade have been at the forefront of domestic innovation, and the report goes on to look at some of the practical A time for new ideas Innovation in Central Eastern Europe and Turkey experiences—based on case studies and survey results—as well as some of the many obstacles they face These include creating internal systems for generating new ideas, difficulties in finding exporting markets and, crucially, attracting talented staff The report then looks at how governments may have helped or hindered the innovation process and where improvements can be made © The Economist Intelligence Unit 2008 A time for new ideas Innovation in Central Eastern Europe and Turkey The current state of play The dominance of foreign multinationals Multinationals (MNCs) have made a huge contribution to the modernisation and technological upgrading of the economies of the EU10 over the past two decades In most countries in the region, the foreignowned sector is very large—average foreign direct investment (FDI) penetration in the EU10 is 42% in manufacturing and 31% in services compared with around 28% and 20% respectively in the EU15 economies—but it generates little demand for local research and development (R&D) services The general pattern is for the cutting-edge R&D work to be kept at MNC headquarters Some MNCs have established R&D facilities in the CEE region, and there are some examples of R&D facilities that have been set up in the EU10 by MNCs that are engaged in cuttingedge research But these are tightly integrated into the global R&D networks of the parent MNC and they not exchange knowledge and experience with domestic actors As a result, their beneficial impact (“positive spillovers”) on the domestic host economy is limited Our survey results generally provide support for this analysis Foreign companies’ opinions of CEE government efforts to encourage innovation, of local companies and of local academic institutions, and of local suppliers, seem to be relatively low Of the 146 wholly owned foreign companies in our survey sample operating in the region: ● Almost one-half had no R&D facilities in the CEE affiliates Among the companies that had set up such facilities, the vast majority were located in only four countries of the region—the Czech Republic, Hungary, Poland and Russia © The Economist Intelligence Unit 2008 ● More than 70% of those headquartered outside the CEE region said that their innovation was carried out exclusively or mostly in company headquarters Only 12% said that it was mostly carried out in CEE ● Only 25% of them said that their CEE sales were predominantly based on products and services that had been developed in the CEE region ● Only 14% said that they expect their innovation activities to increase significantly over the next three years, compared with 26% for domestic CEE companies For R&D activity, the respective figures for foreign-owned and domestic companies were only 4% and 18% respectively ● Only 29% of foreign-owned companies reported that they collaborated with other companies in CEE to develop products and services, compared with 42% of domestically owned companies that reported that they collaborated with other firms in CEE on product development ● Only 12% of the foreign-owned companies rated the innovation environment in their CEE host countries as better than in their home countries, although 21% said that it was the same—and the remainder said that it was worse or much worse ● Only 7% of foreign companies expected the CEE innovation environment to improve substantially over the next three years, compared with 14% of domestic companies (although some two-thirds did expect some improvement) This lower level of optimism about future trends is partly reflected by our forward-looking measure of the innovation environment (see Table 4) ● Only 5% of foreign companies characterise their relationship with local academic institutions as excellent, compared with 13% of domestic companies A time for new ideas Innovation in Central Eastern Europe and Turkey One of the few more encouraging responses concerned reliance on local suppliers, which may reflect the fact that this has indeed been increasing in recent years (in the initial years of FDI in the region, foreign companies relied almost exclusively on suppliers from outside CEE) On local suppliers, 28% of foreign firms agreed with the statement that their supply chain was based primarily on local suppliers This was significantly lower than the 42% of domestic companies, but perhaps still a higher proportion than might have been expected Although the country-specific survey results should be treated with caution because of the limited size of the sample in some cases, they reveal some significant differences in the impact of FDI on the EU10 countries Table The foreign influence (% of wholly and partly foreign-owned firms) Country Firms that over the past three years developed in the CEE more than 50% of the products or services they sold (%) Bulgaria Firms that rate as good or excellent their relations with local academic institutions (%) Firms that agree with the statement that they rely primarily on local suppliers (%) Firms that agree with the statement that they co-operate with local firms to develop products and services (%) 8.3 8.3 8.3 16.7 Czech Republic 31.0 37.9 24.1 31.0 Estonia 50.0 37.5 0.0 12.5 Hungary 33.3 58.3 29.2 29.2 Latvia 50.0 50.0 50.0 25.0 Lithuania 33.3 16.7 50.0 33.3 Poland 48.8 34.1 34.1 36.6 Romania 25.0 56.3 25.0 18.8 Russia 30.0 35.0 22.5 35.0 Slovakia 14.3 14.3 42.9 42.9 Slovenia 14.3 28.6 28.6 28.6 Ukraine 12.5 37.5 25.0 25.0 Ranks Average rank Latvia Hungary Poland Lithuania 10 4 Slovakia 11 Czech Republic 5 Romania 10 Russia 7 10 Slovenia 9 10 Ukraine 11 10 Estonia 12 12 Bulgaria 12 12 11 11 12 Source: The Economist Intelligence Unit © The Economist Intelligence Unit 2008 A time for new ideas Innovation in Central Eastern Europe and Turkey The positive impact on innovation-related factors was most limited in the case of the poorest and newest EU members, Bulgaria and Romania Also noteworthy are the low rankings for Slovenia and Estonia The apparently best-performing countries on these measures were Poland and Lithuania, followed by Latvia and Hungary However, crucially and unsurprisingly, the ability to integrate the latest foreign technology appeared to be the main driver of performance Among domestic companies performing better than their peers, 63% rated their company’s ability to absorb foreign technology as excellent or very good For the underperformers, the percentage was only 35% Looking at particular CEE countries, on the key survey question as to the extent to which domestic companies might be integrated, in terms of innovation, with MNC networks, only Slovene companies, and to a lesser extent firms from Lithuania, recorded respectable results Table Foreign co-operation Domestic companies that agree with the statement that their firm co-operates with MNCs to develop new products and services (%) Slovenia 71 Lithuania 60 Latvia 40 Ukraine 37 Czech Republic 33 Poland 33 Romania 31 Russia 26 Bulgaria 20 Slovakia 20 Hungary Note Insufficient sample size for Estonia Source: Economist Intelligence Unit © The Economist Intelligence Unit 2008 How you expect your company’s R&D investment in CEE to change over the next three years? (% respondents) Domestic firms Increase significantly 18 Increase 65 Remain unchanged Decrease Decrease significantly Don’t know Not applicable&; my company doesn’t invest in R&D in CEE and isn’t planning to so Source: Economist Intelligence Unit Domestic innovation If the spillovers from MNCs are relatively weak, the pressure on domestic firms to innovate is high, not least to induce MNCs to integrate local firms into their global operations On the face of it, our survey revealed some encouraging signs that domestic innovation activity is increasing, and in some cases is now apparently considerable Some 65% of the domestically owned companies in our sample expected their R&D activity to increase over the next three years, and another 18% said it would increase significantly More than 60% stated that over onehalf of their products and services were developed domestically, and 65% rated their relationship with local academic institutions as good or excellent However, when comparing innovation activity in terms of inputs and the environment with actual performance, the link appears to be weak or even non-existent for domestically owned firms This means that policy designed to improve innovation is not particularly effective The existence of internal innovation networks and various indicators of the encouragement by firms of innovation appeared entirely unrelated to their financial performance A time for new ideas Innovation in Central Eastern Europe and Turkey There was no relationship at all between expectations on R&D and innovation changes over the next three years and a company’s performance A few indicators, however, did reveal a positive link between innovation and performance for domestic firms Among domestic companies that performed better than their peers, 69% had developed more than 50% of their products domestically The corresponding figure for companies that underperformed was only 50% Some 58% of the above-average performers, compared with 42% of the underperformers, said that their relationship with local academic institutions was excellent or good Measuring innovation Our innovation model would appear to support the conclusions from our survey that innovation activity in the CEE region has been weak Measuring innovation, especially at the level of the aggregate economy, has always been one of the most perplexing problems facing empirical economics The Economist Intelligence Unit’s model distinguishes between measures of innovation outputs or performance, on the one hand, and of innovation inputs or drivers on the other (For a more detailed analysis of the model, see Appendix 1.) We constructed four indices of innovation for 82 countries worldwide, drawing on the Economist Intelligence Unit’s business environment rankings (BER) model The first index measures innovation output or performance, and is based on international patents data There are also two composite indices, constructed on the basis of BER scores that measure innovation inputs, or innovation enablers The first covers direct innovation inputs and the second the innovation environment or the policy and institutional framework, that is the broad economic, social and political backdrop that facilitates (stimulates or hinders) innovation activity Finally, a fourth index aggregates the index for innovation inputs or enablers that comprises the direct innovation, and the innovation environment indexes The model looks first at innovation in the 2003-07 period, set out in Table 3, and a forecast index constructed for the 2008-12 period, set out in Table The results in Table rank each CEE country and Turkey according to its position in the global ranking of 82 countries, first for innovation inputs or enablers, and second for innovation outputs The table shows that the CEE countries continue to lag some way behind most developed European countries, which in itself may not be particularly surprising But our forecast ranking for 2008-12 in Table 4, based on current forecasts of innovation drivers, suggests that the performance gap will barely narrow In other words, unless CEE countries invest more in innovation inputs than appears likely at present and improve to a greater extent their innovation environments, their innovation performance will not improve dramatically and a key future driver of growth will remain underdeveloped As the tables show, none of the CEE countries is close to the EU average, and all are significantly behind the EU leaders, Finland and Germany, although Slovenia and Hungary perform best Only Estonia comes close to the EU14 average on any measure in the indices—namely the overall environment for innovation—and just surpasses the average over the next five years on this measure However, the measure alone carries less weight overall Interestingly, those countries at the bottom of the performance ranking—Romania, Lithuania, Poland and Bulgaria— are there despite a relatively less poor ranking of their innovation inputs In other words, this would suggest that poor policy implementation is holding them back © The Economist Intelligence Unit 2008 Appendix 1: Economist Intelligence Unit innovation model A time for new ideas Innovation in Central Eastern Europe and Turkey Table Dependent variable: International patents index Coefficients t Stat 0.266 0.751 Innov1 0.2441 2.9956 Innov2 0.7269 16.9849 Adj R2 0.927 Constant N 82 Innov1: Innovation environment index Innov2: Direct innovation inputs index Innovation efficiency A comparison of a country’s rank on its innovation output (performance) with its ranking on direct innovation inputs can provide an insight into the efficiency of innovation A large discrepancy in the two rankings suggests either a high level of efficiency (high innovation output relative to inputs) or a high degree of inefficiency if the direct inputs rank exceeds significantly a country’s ranking on innovation performance A glance at the innovation environment index can in this context also be informative A good innovation environment can help to explain why a country’s direct inputs may be efficiently translated into innovation performance (outputs) An alternative way of measuring efficiency is to compare actual and predicted values from our equation A ratio between actual and predicted performance that is well below suggests innovation inefficiency—lower than expected outputs relative to inputs That is the case for practically all CEE The one exception is of an “efficient innovator” is Slovenia, where the ratio is well above 1—that is, its innovation performance is higher than the inputs would suggest Table International patents index Predicted Actual Actual/ predicteda Austria 8.60 8.91 1.04 Belgium 8.73 8.80 1.01 Denmark 9.52 9.29 0.98 Finland 9.55 9.43 0.99 France 9.23 8.90 0.96 Germany 9.38 9.38 1.00 Greece 6.02 6.59 1.09 Ireland 8.66 8.46 0.98 Italy 7.54 8.41 1.12 Netherlands 9.18 9.12 0.99 Portugal 6.85 6.58 0.96 Spain 7.86 7.47 0.95 Sweden 9.48 9.45 1.00 UK 9.10 8.72 0.96 Bulgaria 6.07 5.79 0.95 Czech Republic 7.46 6.83 0.92 Estonia 7.39 6.75 0.91 Hungary 7.34 7.26 0.99 Latvia 5.97 5.89 0.99 Lithuania 6.18 5.52 0.89 Poland 6.30 5.65 0.90 Romania 5.71 5.25 0.92 Slovakia 6.90 6.26 0.91 Slovenia 7.22 7.68 1.06 Russia 6.44 6.07 0.94 Ukraine 4.82 5.37 1.11 US 9.53 9.48 1.00 a Predicted values based on above regression equation Source: Economist Intelligence Unit The estimated equation above can also be used to predict innovation performance over the next five years Forecast values of the two innovation input indices, based on BER forecast scores, are inserted into the equation to yield forecasts of innovation performance (based on expected patents activity) in 2008-12 (the procedure assumes that estimating errors for the performance equation in 2003-07 also apply in 2008-12) The forecasts for CEE are shown in the table on page 11 of the report © The Economist Intelligence Unit 2008 51 Appendix 1: Economist Intelligence Unit innovation model A time for new ideas Innovation in Central Eastern Europe and Turkey Innovation performance in CEE Research and development (R&D) spending has been widely used as a measure of innovation performance However, R&D is a measure of the inputs that go into the innovation process rather than of innovation output or success A measure of innovation performance should focus on the extent of commercially successful applications rather than on the amount of effort going into developing them In principle, patenting activity gets closer to this Although the use of patent data has a number of problems, this is probably the single best available measure for innovation outputs This conclusion is bolstered by an examination of alternative indicators of innovation performance that correlate closely with patent activity Despite that, patent numbers are an imperfect proxy for overall innovation activity Firms often choose to keep secret innovations that are commercially sensitive; inventions can also be protected by trademarks, design registrations and copyrights; the propensity to patent may also vary according to the costs of patenting; and many patents may never be implemented commercially Patents may even obstruct innovation on occasion if they slow the diffusion of knowledge or pose prohibitive barriers to market entry Inventions, moreover, not all have the same value The value distribution of patents is skewed: a few patents have a high value, whereas many have lower values However, as there are no generally recognised, easily applicable methods for measuring the value of patents, researchers merely count the number of patents meeting various criteria The propensity to patent differs greatly across industries, affecting comparisons based on economy-wide data International comparisons are also affected by differences in procedures and standards across patenting offices One patent measure that reduces some of these problems, and that has been widely used in international comparisons, is that of the so-called triadic patent families Triadic patents are those that have been applied for at the European Patent Office (EPO) and the Japan Patent Office (JPO), and granted by the US Patent and Trademark Office (USPTO) to protect the same invention The triadic patents are counted on the basis of the earliest priority year: the year in which a patent was first applied for at any patent office Data by priority date, as opposed to filing or grant dates, provide a better indication of the date that the invention was made and are thus probably a more accurate measure of inventive performance at any given point in time 52 © The Economist Intelligence Unit 2008 Table Triad patents per million population 2000 2001 2002 2003 Bulgaria 0.11 0.25 0.17 0.40 2004 2005 0.33 0.29 Czech Republic 0.60 0.92 1.05 1.12 1.08 1.11 53.56 52.51 53.03 Germany 53.79 Estonia 0.84 1.81 0.42 1.56 53.97 53.85 1.28 1.42 Hungary 1.62 1.47 1.31 1.76 1.88 1.77 Latvia 0.73 0.68 0.60 0.79 1.01 1.18 Lithuania 0.28 0.19 0.17 1.54 0.36 0.08 Poland 0.16 0.15 0.22 0.18 0.19 0.20 Romania 0.01 0.01 0.02 0.03 0.00 na Slovenia 1.81 1.73 2.62 2.49 3.00 2.73 Slovakia 0.02 0.02 0.02 0.02 0.02 0.02 EU10 5.45 5.53 5.37 5.72 5.74 6.26 EU15 22.86 23.09 22.20 22.02 22.25 22.33 EU27 20.82 21.02 20.63 20.67 20.85 20.76 Turkey 0.10 0.07 0.08 0.10 0.13 0.21 Sources: Eurostat; OECD However, although triadic patents are in some ways easier to compare across countries, they cover only a small subset of total patents They are also biased towards hightechnology fields and thus may present a skewed picture of total innovation performance We therefore constructed another patent measure as the sum of patents applied for by, or granted to, a country’s applicants by regional centres—that is, the USPTO, the EPO and the JPO This differs from triadic patents in that a patent need not be filed in all three offices to be counted Appendix 1: Economist Intelligence Unit innovation model A time for new ideas Innovation in Central Eastern Europe and Turkey Table International patents per m, 2003-05 Bulgaria 1.0 Czech Republic 5.3 Estonia 4.6 Hungary 10.4 Latvia 1.2 Lithuania 0.65 Poland 0.81 Romania 0.43 Slovakia 2.1 Slovenia 20.2 Russia 1.6 Turkey 0.4 Ukraine 0.5 Austria 141.3 Belgium 119.2 Denmark 259.8 Finland 321.7 France 139.5 Germany 300.3 Greece 3.6 Ireland 69.9 Italy Netherlands Portugal Spain 64.3 198.3 3.5 14.4 Sweden 334.6 UK 105.1 Sources: Eurostat; OECD Alternative measures of innovation outputs Given the various possible problems with the patents measure, it is worth exploring alternative measures of innovation performance and the sensitivity of innovation performance rankings to the use of the patents measure We looked at three other indicators that all have various problems, but can be seen as measures of, or imperfect proxies for, innovation performance Citations from scientific and technical journals (per million population) The data are for 2003 from the US National Science Foundation and Thomson ISI, Science Citation Index The average of the share of medium- and hightechnology products in manufacturing output and the share of medium- and high-technology exports in total manufacturing exports The data are from the UN Industrial Development Organisation’s Industrial Development Report The results of a survey question from the World Economic Forum’s Global Competitiveness Report, that asked respondents to rate the capacity of firms in 125 countries for innovation The original results are on 1-7 scale (which we converted to a 1-10 scale) A composite measure of performance can be constructed that consists of these indicators as well as our patents measure (by converting each indicator to an index on a 1-10 scale) The composite index, which is set out in the table below, gives very similar results to the patents-only measure Innovation inputs drivers R&D activity is a key direct input for innovation Education levels have a significant influence on the availability of human resources for science and technology Skilled researchers play a key role in the innovation process The level of information and communications technology (ICT) development is another factor that is associated with innovation performance The new member states of the EU, with the exception of Slovakia, Romania and Bulgaria, spend non-negligible proportions of their national income on R&D—although these are much lower than during the communist era and significantly lower than the figure for the EU15 Three of the most advanced EU10 spend more than 1% of GDP on R&D Although they lag behind the EU15, the numbers of R&D personnel per 1,000 population in the EU10 are relatively large, given these countries’ level of development However, the output of R&D personnel in the EU10, in terms of commercially useful innovation, is low Furthermore, the business sector still accounts for only a small share of total R&D personnel in the EU10 In the EU15, by contrast, business sector R&D workers account for well over one-half of the total © The Economist Intelligence Unit 2008 53 Appendix 1: Economist Intelligence Unit innovation model A time for new ideas Innovation in Central Eastern Europe and Turkey Table Performance indexes (1-10 scale) Composite index Patents Medium- and high-tech manufacturing Citations Capacity for innovation Bulgaria 5.30 5.79 5.47 6.82 3.14 Czech Republic 7.15 6.83 7.79 7.84 6.14 Estonia 6.35 6.75 5.91 7.88 4.86 Hungary 7.17 7.26 8.70 7.87 4.86 Latvia 5.05 5.89 3.94 6.38 4.00 Lithuania 5.31 5.52 4.86 6.21 4.64 Poland 5.92 5.65 5.91 7.25 4.86 Romania 4.68 5.25 4.15 5.77 3.57 Slovakia 6.36 6.26 7.64 7.34 4.21 Slovenia 7.57 7.68 7.32 8.27 7.00 Bulgaria 7 10 Czech Republic 3 Estonia 5 Hungary 2 3 Latvia 10 8 Lithuania 9 Poland Romania 10 10 10 Slovakia 5 Slovenia 1 1 Rank Source: Economist Intelligence Unit 54 © The Economist Intelligence Unit 2008 Appendix 1: Economist Intelligence Unit innovation model A time for new ideas Innovation in Central Eastern Europe and Turkey Table R&D in CEE Governmentfunded R&D (% of GDP) 2004 Private-sector funded R&D (% of total) 2004 Real R&D spending (% annual growth, 2001–05) 2004 2005 Private-sector funded R&D (% of GDP) 2004 1.91 1.91 1.05 0.86 55.2 1.4 0.51 0.50 0.14 0.37 28.2 6.6 Czech Republic 1.26 1.42 0.67 0.59 52.8 8.3 Estonia 0.88 0.94 0.32 0.56 36.5 16.5 Hungary 0.88 0.94 0.33 0.55 37.1 5.0 Latvia 0.42 0.57 0.19 0.23 46.3 17.6 Lithuania 0.76 0.76 0.15 0.61 19.9 11.4 Poland 0.56 0.57 0.15 0.41 26.9 1.1 Romania 0.39 n/a 0.17 0.22 44.0 n/a Slovakia 0.51 0.51 0.20 0.31 38.3 -0.6 Slovenia 1.45 1.22 0.85 0.60 58.5 n/a EU15 EU10 Bulgaria Sources: Eurostat; OECD Table R&D personnel by sector of performance, 2004 (full-time equivalent, per 1,000 population) Total Business Government EU15 Estonia Table Innovation inputs Population New S&E with tertiary graduates education per 1,000 per 100 population population (aged (aged 20-29) 25-64) Higher education 4.86 2.73 0.64 1.43 3.7 0.74 0.74 2.22 Broadband penetration rate (no of broadband lines per 100 population) ICT expenditure (% of GDP) Latvia 2.17 0.43 0.43 1.3 2005 2006 2006 2005 Lithuania 3.19 0.29 0.87 2.03 EU27 average 12.9 23.0 16.5 6.4 Poland 2.04 0.34 0.52 1.18 EU15 13.9 26.3 17.6 6.5 Czech Republic 2.83 1.46 0.78 0.59 Bulgaria 8.6 21.9 9.9 Slovakia 2.57 0.55 0.74 1.29 Czech Republic 8.2 13.5 8.4 6.6 Hungary 2.3 0.7 0.8 0.8 Estonia 12.1 33.3 16.6 9.8 Slovenia 3.5 0.5 Hungary 5.1 17.7 7.5 8.1 Romania 1.52 0.74 0.46 0.32 Latvia 9.8 21.1 6.8 9.6 Bulgaria 1.94 0.26 1.29 0.39 Lithuania 18.9 26.8 8.4 7.8 Poland 11.1 17.9 3.9 7.2 Romania 10.3 11.7 8.2 Source: Eurostat, Science, Technology and Innovation in Europe, 2007 edition Table below gives comparative data for a range of other indicators that represent, or are associated with, direct inputs for innovation Creating and implementing innovation requires, above all, a highly trained workforce with skills in science and technology Indeed, variations in the share of trained scientists and engineers in the workingage population across countries closely mirror differences in R&D intensities Slovenia 9.8 21.4 11.4 5.4 Slovakia 10.2 14.5 4.0 6.7 Source: Eurostat © The Economist Intelligence Unit 2008 55 Appendix 2: Survey results A time for new ideas Innovation in Central Eastern Europe and Turkey Appendix 2: Survey results In Spring 2008, the Economist Intelligence Unit surveyed 370 executives from around the world, but operating in Central Eastern Europe Our sincere thanks go to all those who took part Please note that not all answers add up to 100% because of rounding or because respondents were able to provide multiple answers to some questions Approximately what portion of your company’s local/regional revenues comes from products and services that are less than one year old? Three years old? (% respondents) None 1% to 33% 34% to 66% 67% to 100% Don’t know Less than one year old 13 58 13 13 Less than three years old 41 28 Which of the following best describes your company's ownership structure? 21 Does your company have any of the following formal procedures/structures in place to support innovation? Select all that apply (% respondents) (% respondents) Wholly domestically owned or headquartered in CEE An internal innovation network 39 38 Partially foreign owned 19 Wholly foreign owned Other 39 A dedicated team responsible for innovation 28 Financial compensation for innovative activity 26 An award for innovative activity 24 An external innovation network (with suppliers, academia, etc) 23 Funding allocated specifically to innovation 16 An internal “innovation champion” 14 A process for employees to take time off regular work to pursue innovation projects 14 Other None of the above 22 56 © The Economist Intelligence Unit 2008 Appendix 2: Survey results A time for new ideas Innovation in Central Eastern Europe and Turkey In the past three years, approximately what share of the products and services sold locally by your company were developed in CEE? Which of the following factors are most important for your company in driving its need to innovate? Select up to three (% respondents) (% respondents) Competition 69 None Changes in industry or market structure Less than 1% 58 Changes in consumer tastes or habits 1% to 10% 45 16 Inadequacy of a process, product or service 11% to 50% 32 14 Maturity of existing product portfolio 51% to 90% 27 13 Changes in supply chain 91% to 100% 32 Demographic changes Don't know Other Not applicable Don’t know In which of the following CEE countries does your organisation have dedicated R&D facilities (eg, a formal department or physical R&D site)? Select all that apply (% respondents) If your company is headquartered outside CEE, which best describes the location of its innovation (eg, new product development or process improvement)? (% respondents) Exclusively in its headquarters country or region Poland 16 Mostly in its headquarters country or in its headquarters’ region Russia 26 15 Mostly outsourced to another region Czech Republic 11 Mostly in CEE Romania 10 Don’t know Hungary Not applicable; my company is headquartered in CEE 48 Ukraine Other, please specify Over the next three years, how you expect the importance of CEE/your home country as an innovation centre for your company to change? Slovakia (% respondents) Bulgaria Increase significantly Slovenia 20 Increase Estonia 43 Remain unchanged Lithuania 32 Decrease Latvia Decrease significantly We not have R&D facilities in CEE 36 Don’t know Don’t know © The Economist Intelligence Unit 2008 57 Appendix 2: Survey results A time for new ideas Innovation in Central Eastern Europe and Turkey To what extent are products, services, and processes developed by your company in CEE applicable to your company's business in the following markets? (% respondents) Designed exclusively for this market Highly applicable Somewhat applicable Not applicable Don’t know Domestic market 28 49 10 10 CEE region as a whole 46 26 15 Other emerging markets 29 39 21 22 Developed markets 30 35 How you expect your company’s R&D investment in CEE to change over the next three years? How would you characterise your firm’s relationships with universities/academic institutes in CEE? (% respondents) (% respondents) Increase significantly 10 Excellent Increase 57 Remain unchanged 21 Decrease 38 Poor 26 Very poor 11 Don’t know Decrease significantly Good Not applicable; my company doesn’t have relationships with universities/academic 14 institutes in CEE Don’t know Not applicable&; my company doesn’t invest in R&D in CEE and isn’t planning to so How you rate your firm’s ability to integrate the latest foreign technology? How supportive of private sector innovation is your home country’s government? (% respondents) (% respondents) Excellent Very supportive 13 37 Not supportive Good 41 Poor Very poor Don’t know Not applicable 58 © The Economist Intelligence Unit 2008 Somewhat supportive 48 Very good 41 Actively obstructive Don’t know Appendix 2: Survey results A time for new ideas Innovation in Central Eastern Europe and Turkey How effective are academic centres in the each of the following fields in your home country? (% respondents) Very effective Somewhat effective Very ineffective Don’t know/ Not applicable Biotech 10 35 17 38 Information technology 32 47 13 Management sciences 47 27 17 Engineering 22 49 20 Life sciences 36 23 34 Physical sciences 12 37 17 33 To what extent you agree with the following statements? Rate on a scale of to 5, where 1=Agree strongly and 5=Disagree strongly (% respondents) Agree strongly Disagree strongly Don’t know My company collaborates with multinational companies operating in CEE to develop new products and services 15 21 23 18 20 My company collaborates with domestic companies in CEE to develop new products and services 13 23 24 22 17 My company's supply chain includes primarily local suppliers 12 24 22 20 16 15 My company's supply chain includes primarily foreign suppliers 12 18 26 23 How you rate the innovation environment in your home country today relative to that of your company’s headquarters? How you expect the innovation environment in your home country to change in the next three years? (% respondents) (% respondents) Better than headquarters Improve substantially 11 Same as headquarters Improve 22 66 Worse than headquarters Remain unchanged 27 21 Much worse than headquarters Worsen Don’t know Worsen substantially Not applicable; I am based in my company’s headquarters Don’t know 32 © The Economist Intelligence Unit 2008 59 Appendix 2: Survey results A time for new ideas Innovation in Central Eastern Europe and Turkey How important are the following factors as innovation drivers in CEE for your company? (% respondents) Very important Somewhat important Not at all important Don’t know/ Not applicable Political stability 47 46 61 Macroeconomic stability 62 36 Institutional framework (eg, public administration, rule of law, extent of corruption) 57 39 31 Regulatory environment (eg, ease of doing business, licensing, opening new businesses) 68 29 Tax regime (eg, tax burden, fairness and consistency of tax system, incentives for investment) 52 43 Flexibility of labour market 34 48 17 Openness of national economy to foreign investment 46 41 12 Popular attitudes toward scientific advancements 22 47 27 30 Access to domestic public funding 20 45 Access to EU funds 35 39 22 Protection of intellectual property 51 34 13 How you rate your home country environment on these same factors? (% respondents) Strong Average Weak Don’t know Not applicable Political stability 20 56 23 1 Macroeconomic stability 24 53 21 1 Institutional framework (eg, public administration, rule of law, extent of corruption) 34 56 1 Regulatory environment (eg, ease of doing business, licensing, opening new businesses) 13 40 45 1 Tax regime (eg, tax burden, fairness and consistency of tax system, incentives for investment) 17 38 43 1 Flexibility of labour market 13 46 38 Openness of national economy to foreign investment 36 50 13 Popular attitudes toward scientific advancements 12 48 34 3 Access to domestic public funding 38 50 Access to EU funds 16 48 31 Protection of intellectual property 12 60 © The Economist Intelligence Unit 2008 44 42 1 Appendix 2: Survey results A time for new ideas Innovation in Central Eastern Europe and Turkey How important are the following factors as innovation drivers in CEE for your company? (% respondents) Very important Somewhat important Not at all important Don’t know/ Not applicable Total R&D spending in the country 24 44 21 10 22 10 28 10 Private sector R&D spending 30 38 Public sector (government) R&D spending 19 44 Availability of scientists and engineers 53 29 11 Availability of university graduates 56 34 Technical skills of the workforce 54 38 Quality of IT and communications infrastructure 56 37 Broadband penetration 32 48 12 How you rate your home country on these factors? (% respondents) Strong Average Weak Don’t know Not applicable Total R&D spending in the country 29 58 Private sector R&D spending 40 46 63 Public sector (government) R&D spending 25 Availability of scientists and engineers 21 55 21 2 Availability of university graduates 27 55 17 Technical skills of the workforce 27 54 18 1 Quality of IT and communications infrastructure 27 53 19 1 Broadband penetration 14 46 33 © The Economist Intelligence Unit 2008 61 Appendix 2: Survey results A time for new ideas Innovation in Central Eastern Europe and Turkey In which country are you personally based? What is your primary industry? (% respondents) (% respondents) Financial services Poland 27 18 Professional services Russia 12 17 Healthcare, pharmaceuticals and biotechnology Czech Republic 10 10 IT and technology Romania 10 Construction and real estate Hungary 10 Manufacturing Bulgaria Telecommunications Ukraine Energy and natural resources Slovenia Consumer goods Slovakia Retailing Lithuania Entertainment, media and publishing Estonia Transportation, travel and tourism Latvia 2 Education Other 11 Government/Public sector Chemicals In which region is your company headquartered? (% respondents) Automotive CEE Logistics and distribution 53 Europe (other than CEE) 31 Agriculture and agribusiness North America 12 Asia-Pacific Middle East and Africa What are your company’s annual global revenues in US dollars? (% respondents) Latin America $100m or less 41 $100m to $500m 15 $500m to $1bn $1bn to $5bn 62 © The Economist Intelligence Unit 2008 13 $5bn to $10bn $10bn or more 16 Appendix 2: Survey results A time for new ideas Innovation in Central Eastern Europe and Turkey How you rate your company’s recent financial performance compared to that of its peers? (% respondents) Ahead of its peers 33 On par with its peers 56 Behind its peers 11 What is your title? (% respondents) Board member CEO/President/Managing director 27 CFO/Treasurer/Comptroller 10 CIO/Technology director Other C-level executive SVP/VP/Director Head of Business Unit Head of Department 12 Manager 16 Other © The Economist Intelligence Unit 2008 63 Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in the white paper LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8476 E-mail: london@eiu.com NEW YORK 111 West 57th Street New York NY 10019 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com [...]... Economist Intelligence Unit 2008 COUNTRY DATA A time for new ideas Innovation in Central Eastern Europe and Turkey Country data Estonia Hungary Czech Republic Slovenia Latvia Lithuania Poland Romania Slovakia Russian Federation Turkey © The Economist Intelligence Unit 2008 27 COUNTRY DATA: ESTONIA A time for new ideas Innovation in Central Eastern Europe and Turkey Estonia Regulatory and policy framework Innovation. .. network An internal innovation network 37 Financial compensation for innovative activity 43 A dedicated team responsible for innovation 35 An external innovation network (with suppliers, academia, etc) 31 An award for innovative activity 30 A dedicated team responsible for innovation 28 Financial compensation for innovative activity 27 An award for innovative activity 22 An external innovation network (with... 2008 23 A time for new ideas Innovation in Central Eastern Europe and Turkey Turkey: harnessing creativity In many ways, Turkey stands in striking contrast to the former communist countries of Central Eastern Europe Its population is expanding, but remains largely poor and poorly-educated and is mainly rural or concentrated in far-flung provinces, urban slums or city peripheries Yet it has a long history... It takes a huge amount of time and mental strength to beat that,” he says (See case study, NeoQi: Small nation, big deal.) A time for new ideas Innovation in Central Eastern Europe and Turkey CASE STUDY NeoQi: Small nation, big deal Kert Schneider, marketing manager and board member of NeoQi, an Estonian firm that makes sauna and water treatment equipment, says that being from a small country involves... working together,” notes Mr Banach But the company does link employee bonuses to key performance indicators—both financial and nonfinancial in its budget A time for new ideas Innovation in Central Eastern Europe and Turkey The role of government All governments claim that innovation is a priority, and the state’s role is crucial for improving the overall environment for innovation as our innovation. .. science and engineering graduates, and those with a tertiary education The broadband penetration rate stood at 59% of the EU average in 2007 ● Patent applications to the European Patent Office were 12% of the EU average in 2003, and triad patents applied were 5% of the EU average for the four years to 2005 COUNTRY DATA: CZECH REPUBLIC A time for new ideas Innovation in Central Eastern Europe and Turkey. .. But academia in general pays scant attention to industry and commerce, and access to funding is complicated by bureaucracy, delays and demands for excessive collateral Such complaints echo those throughout Central and Eastern Europe Similarly, in the case of small firms or start-ups in Turkey, many generate more technical ideas than have capacity to draw up projects, keep transparent accounts or market... venture capitalists, this is difficult It is hard to get starting capital, and entrepreneurs with technical skills lack the finance, law and business knowledge for starting a business The government should streamline the bureaucratic procedures needed for startups, and make it cheaper.” A time for new ideas Innovation in Central Eastern Europe and Turkey and social security payments when the company needs... Romanian eLearning provider, which in 15 years has grown into one of the country’s leading software firms with some 750 staff, sees a risk that A time for new ideas Innovation in Central Eastern Europe and Turkey Does your company have any of the following formal procedures/structures in place to support innovation? (% respondents) Domestic firms Foreign firms An internal innovation network An internal... introducing a formal © The Economist Intelligence Unit 2008 17 A time for new ideas Innovation in Central Eastern Europe and Turkey incentives programme to encourage innovation, but decided against it “If you implement such a programme, you have to spend a lot of time deciding who the real innovator is and who should be rewarded And that can be very destructive for team spirit and 18 © The Economist Intelligence ... COUNTRY DATA: ESTONIA A time for new ideas Innovation in Central Eastern Europe and Turkey Estonia Regulatory and policy framework Innovation inputs and performance ● The Organisation of Research and. .. encouragement by firms of innovation appeared entirely unrelated to their financial performance A time for new ideas Innovation in Central Eastern Europe and Turkey There was no relationship at all... But the company does link employee bonuses to key performance indicators—both financial and nonfinancial in its budget A time for new ideas Innovation in Central Eastern Europe and Turkey The